Metal companies to get battered for second consecutive quarter

The earnings performance of metal companies, both ferrous and non-ferrous, is expected to remain lacklustre for the second consecutive quarter because of a decline in steel realisation, increased cost of provisioning for the district mineral foundation fund, and a significant fall in aluminium premiums.

“The June quarter will be the third consecutive quarter of net profit de-growth. Such consecutive de-growth was last witnessed in September 2009, during the global financial crisis,” said a report by Motilal Oswal Securities. “Metals will be reporting their lowest PAT (profit after tax) in eight years,” it added.

Large integrated steel producers like Tata Steel, Steel Authority of India and Jindal Steel & Power and non-ferrous metal companies like Vedanta and Hindalco were expected to put up a poor show for yet another quarter, analysts said.

Continuous import pressure from China, Japan and South Korea, along with a sharp fall in global steel prices, is expected to keep volumes and realisations of domestic steel companies muted. During April and May, steel imports increased 55 per cent, year on year, to 1.7 million tonnes, while exports declined 35 per cent to 0.7 million tonnes, battering domestic steel producers on both fronts.

“Companies with a higher export mix like JSW Steel will see a sharp decline in export realisation (down 10 per cent, quarter on quarter) which, in turn, will hurt their profitability,” said Kotak Institutional Equities in a report.

Since a limited drop is expected in raw material costs, this will result in margin pressure as well. During the quarter steelmakers would report 2-20 per cent sequential declines in earnings before interest, tax, depreciation and amortisation (EBITDA) for their Indian operations, the Kotak Institutional Equities report added.

For Tata Steel, blended realisations were expected to drop by 3.2 per cent, quarter on quarter, said brokerage firm Centrum. “We expect European operations to deliver EBITDA/tonne of $35 on account of pressure on spreads despite lower raw material prices. The consolidated EBITDA of Tata Steel is expected to be lower by 47 per cent, year on year,” it added.

Margins of Jindal Steel were also seen under pressure due to higher coal costs after the closure of mining operations, said Kotak Institutional Equities Research.

In the non-ferrous segment, where aluminium premiums had tumbled sharply, producers might report 26-35 per cent declines in EBITDA, quarter on quarter, analysts said.

“Hindalco’s EBITDA is seen declining 17 per cent but revenues are expected to move up due to higher volumes fed by the Mahan and Aditya smelters,” said Centrum.

Hindustan Zinc’s EBITDA is also seen falling sequentially due to lower mined metal volumes and higher provision for district mineral foundation costs. A sequential improvement in Vedanta’s EBITDA, however, was likely because of normalisation of Zinc International’s operations after a disruption in January-March 2015, said Kotak Institutional Equities Research.

Noting the grim scenario for the metals sector, brokerages have recommended sell for SAIL and Tata Steel. For the non-ferrous companies, however, brokerages are relatively positive and have placed a buy call for Vedanta and Hindustan Zinc.

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